China’s Oil Futures Contract Is Beginning to Show Its Teeth
China’s Oil Futures Contract Is Beginning to Show Its Teeth by Rory – The Daily Coin
So far so good. Petrodollar will be showing signs of wear-and-tear in the very near future.
We have been documenting the demise of the dollar hegemony for the past several years and the past two years the pace of the demise seems to be moving like a rocket. All the little details since the global financial meltdown in 2008 are now converging and one of the biggest pieces is now showing its teeth – the Chinese oil futures contract priced in yuan is growing in such a way that by the years end, at the current pace of growth, this contract will present a real challenge to the petrodollar.
China’s newly-launched crude oil futures on the Shanghai International Energy Exchange saw its trading volume surge to a record high in early June, a positive sign that a wide variety of financial market players have been keen to contribute liquidity into the new derivative market.
The trading volume for the front-month September delivery crude futures contract was recorded at 275,006 lots last Friday, the highest since it was launched on March 26, and nearly seven times the 40,656 lots seen on the first trading day, data from INE’s website showed.
This normalizes to 137,503 lots based on international practice, as INE counts each side of a trade – the buy and the sell — as two lots. One lot is equivalent to 1,000 barrels. That means around 137.5 million barrels of crude oil changed hands on paper last Friday, S&P Global Platts calculations showed.
INE crude oil futures’ trading volume has been rising steadily since the launch on March 26, with the average daily volume seen at 69,055 lots in April and 170,554 lots in May — a rise of 147% month on month. Source – Platts
I don’t know much but a 147% growth month-on-month sounds like a serious jump and on top of that June is already showing signs this pace is not a fluke and will continue into the future. While this market is still in the earliest of stages of development the pace of growth seems to be significant and catching a lot of people by surprise. It appears the first major hurdle to catching the Brent and West Texas Intermediate (WTI) contracts will be to surpass the Dubai Mercantile’s contact that averages more than 54,000 daily contacts. With the current pace of the Chinese contract that hurdle will be in the rearview mirror by years end and certainly by the end of Q1-19.
The two major contracts, Brent and WTI, have a combined daily total of 2.6 million contracts so the Chinese contract has some ways to go before it posses any kind of real threat but it is well on its on way to establishing itself as a global force.
Although the new INE crude futures market has been widely considered a success so far, it is still very small compared with mature international crude benchmarks in terms of trading volume and open interest, market participants noted.
Currently, ICE Brent and NYMEX light sweet crude futures are the two leading global benchmarks.
The Brent futures’ trading volume averaged 1 million lots/day on ICE in May, with open interest seen at an average of 2.6 million lots in the month, according to data on ICE website. Source – Platts
We should have better data and a better view after the July numbers print. My guess is, the new China contract is going to continue growing and petrodollars are going to continue waning. Does it really matter if this new contract actually threatens the petrodollar? What if this new contract just takes enough business to sustain the Chinese need to move away from Federal Reserve Notes? You know, 10%, 20% – what about 50%? What if this new contract allows China to simply add more gold to their vault or another “leg” to the Belt and Road Initiative or another 15 nuclear plants/solar farms? Then what? Does it matter if it is a global force in the oil world? How much damage would a 35% (780,000 monthly contracts) decline in petrodollars create in the western economies? I’m guessing unrecoverable.